New York Hospitality by Vijay Dandapani

Hotel Oligopsonies - OTAs

A munificent supply of projects from the liquidity glut of the last bubble has ensured depressed RevPars for many markets in the US, particularly Manhattan resulting in a few large buyers (read OTAs) controlling fragmented (and many) sellers. Economists refer to such buyers as Oligopsonies, a situation where there are few buyers who "control" the market. Examples abound in other industries from radio stations (Clear Channel) to the music industry where Live Nation is dominant in the area of live music.

Economic history shows that oligopsonies generate oligopolies as the negotiating power of the bit player is gradually dissipated to the point of being non-existent. Essentially, the olipsonists can dictate prices even to the point of putting suppliers out of business. Over time they become oligopolies as they take over the selling function almost completely and effectively are sellers. In the hospitality sphere, it is true that there are scores if not hundreds of credible OTAs but there a mere handful - probably four - who pose the greatest threat in terms of pricing pressure. Could those oligopsonies become oligopolies?

For starters, OTAs have moved from being mere data repositories to building brand recognition via frequent stay awards and travel tips while increasing their spending on consumer research. Most of the top OTAs like the Big Four viz. Orbitz, Expedia, Hotwire and Travelocity have also shored up their offerings to compete with brick and mortar travel agents by offering a near-complete menu of offerings such as Travelocity's Experience Finder. 

Another aspect that entrenches OTAs and enabling oligopsonic pricing is the steep growth in opaque travel sites particularly those operated by the big four. The latest entrant to the field of "secret pricing" is Travelocity as recently reported in the New York Times travel blog heretofore dominated by Hotwire and Priceline. Now Travelocity customers too can take advantage of "deep discounts to customers willing to pay before knowing which hotel they’re committing to" by looking up their rather unimaginatively named "Top Secret Hotels". Somewhat unsurprisingly, the purveyors in the site are 3 and 4 star hotels, the segments most susceptible high negative price elasticity of demand. Initially, hotels participated thinking that by filling up a base with price sensitive customers who did not differentiate between products and then maximizing prices via customers who discriminated on account of service characteristics. That it was a slippery slope to maximum price erosion is now apparent.

The road to price domination and market control is far from smooth. While on the ascendant now, much of their growth is driven by the Great Recession and compression in prices owing to excess supply from the financial glut that enabled it. A couple of factors are likely to check their ascendance one of which is the occupancy tax cases they face in many jurisdictions who are trying to recover "lost" tax dollars on account of the OTAs ability to not pay occupancy tax on the spread in the room rate between what the establishment sells to them at and what they charge the guest. There have been over 50 lawsuits with OTAs prevailing in most of them thus far but jurisdictions are likely to respond by closing the lacunae in their tax code that would make OTAs liable.  Faced with paying an occupancy in the future on what has been virtually pure profit for them, they are less likely to continue to develop into the behemoths that they have almost become. To counter that, OTAs are banding together to try and get the Feds involved in giving them a permanent exemption via a congressional bill. However, a financial revival with better RevPar more than any other concerted action on the part of hoteliers is likely to thwart their growth as it diminishes the incentive of hoteliers to be in thraldom to the OTAs as is the case now.

Ultimately, should the OTAs become real oligopsonies, it would be a deleterious outcome for the industry as they, like oligopolies, could crimp supply artificially in order to drive up their end-user prices. A renewed effort to promote proprietary sites a la the airline industry could go some way to stem their power, A noticeable holdout among the airlines has been Southwest Airlines whose fares are not available on any of the OTAs. It is no accident that it is one of the few successful airlines in a cheerless industry. 

Data theft redux

Today's Wall Street Journal has a report in its travel section headlined "Data Breaches Are Heaviest at Hotels".  Somewhat alarmingly, the article notes that "hackers are now stealing credit-card data from hotels more often than any other industry, according to data-security companies." According to SpiderLabs, a unit of data-security firm Trustwave,  38% of data-breach investigations conducted by the firm in 2009 occurred at hotels while financial services accounted for a mere 19%. What is worse is the fact that it takes an average of 156 days for a business to realize it has been a victim of an attack.

Earlier this month Wyndham hotels admitted on their corporate website that they had "‘discovered a sophisticated hacker penetrated the computer systems of one of the Wyndham Hotels and Resorts (WHR) data centres over a three-month period'.  Wyndham's breach occurred in the third quarter of 2009 but was announced only this month. It is not clear when the company discovered the breach.

Hotels may be the most susceptible but higher profile breaches have occurred with distressing periodicity in financial services including last week when HSBC announced an eye-popping 24,000 clients had their personal information compromised!  

Privacy Rights Clearing House, a non-profit primarily associated with advocating consumers' privacy rights, has a chronology of data theft that goes back to 2005. While not comprehensive it details data-breaches across industries including the hotel industry with the first incident being at the Atlantis hotel in January 2006 and all the way to the Wyndham loss of last year.

Data thieves are likely to improvise continually in an attempt at keeping ahead of regulators and corporations seeking to erect barriers but for now as the Wall Street Journal article suggests "there is little customers can do to protect themselves besides checking their credit-card statements carefully."  Suggestions for businesses include "follow(ing) data-security standards established by the PCI Security Standards Council, an organization founded in 2006 by the credit-card industry to improve commercial and customer protection". Apparently, companies that are PCI Data Security Standard compliant are less likely to fall victim to cyber-thieves. Wyndham is among the hotels seeking to become PCIDSS compliant. It behooves every hotel company, big or small, to strive for the same.

ITB round up

ITB Berlin which concludes on March 14th had an unprecedented start on the 10th in terms of exhibitors.Messe-Berlin, the agency that runs the world's largest tourism show, reports that over 11,000 exhibitors from 187 countries showed up despite reduced travel budgets and a continuing overhang from the financial recession. An interesting addition is the fair's social media lounge which featured papers and discussions about various aspects of social media most of which were led by the leader in the field Phocuswright There was no charge for the sessions). As has been the practice in recent years, there was a country sponsor with Turkey filling that role with reps from the country doing a stellar job offering tasty Turkish bites and even bottled sea-water (which caused a commotion in the stands as many mistook it for free Vodka!)

The US pavilion, although again in the basement level, was fully booked including with new exhibitor, IGLTA (International Gay & Lesbian Travel Association). The focus of the US, though was the newly signed Travel Promotion Act which was discussed at a press conference on March 12th. Most journalists questions revolved around the $10 fee including whether or not credit cards will be accepted (not yet) and on ESTA In an indication of continued strong German interest in the US, a press event on the morning of  March 13th in the Hong-Kong room however, had a full complement of journalists, print and online, keen on running stories on most US states. US Ambassador Philip Murphy and Roger Dow spoke about the central role of inter-country tourism.

ITB Aviation Day had speakers from Turkish Airlines, Air Berlin and Garuda noting the flight of premium passengers from their midst owing to the great recession and about how the industry expects further consolidation and joint ventures between airlines. While their prognosis did not indicate a quick resumption in travel by premium passengers, the Financial Times has a report quoting IATA that "airlines are recovering from the global financial crisis more quickly than expected, with a surge in passenger numbers on a reduced number of aircraft leading to a rise in ticket prices." Those are certainly good portends for travel and hospitality. That could well be the takeaway from this year's ITB

Advertising a firm's best asset: Customer Service Reps

The New York Times section on Media and Advertising has an interesting article on the customer and internet savvy retailer, Zappos which was recently acquired by the even savvier Amazon. The article notes that "In a (ad) campaign scheduled to begin on Monday (March 8th 2010), Zappos will celebrate its customer service representatives, whom the company refers to as the customer loyalty team. The intent is to demonstrate to potential customers — and remind current ones — how the employees make it easy to order or return merchandise, either on Zappos.com or by calling a toll-free number."  The article also quotes a Mullen (the ad company that created the ad) executive as saying that employees would "would stay on the line for as long as you wanted to talk. They would talk about anything.” A Zappos director also notes that "our customer loyalty team is not scripted and is not measured on time of calls." 

Clearly Zappos is a customer service darling and a principal reason is that they view their call center not as a cost but as a primary value driver. Historically most companies, including in the hospitality industry  relegated call centers to remote parts of the country and, increasingly, out of the country resulting in poor CRM outcomes. Leveraging technology positively - as opposed to inserting it as a barrier as in the case of airlines and even some hotels - requires a more inclusive approach to employees. That means giving customer service reps more leeway in dealing with customers including allowing them to determine the length of a call per the customers' needs. Software that merely measures time spent per reservation (for hotels)  most probably will not serve the company well. Instead a measure of additional services and packages and even room nights sold by CSRs will better serve the employer. Also to be measured, as a consequence,  is employee churn and absenteeism; both ought to be less.

The other seemingly obvious benefit to the ad campaign is better employee morale. Exposure to potential customers as models of what employees are truly about enables higher productivity and better customer-employee relations. Naturally, in the end, that results in a happier customer with the resulting higher profits mitigating any increase in call center costs. The Times article also cites other employee-centric marketers including Exxon Mobil, Ford Motor, Lowes, Nationwide Insurance, Toyota Motor  and Verizon. Apparently no hotel companies made the cut.